New Queensland think tank the Australian Institute for Progress (AiP) has released a set of high-level policies for the Queensland election, which are mostly consistent with sound public finance and the promotion of free markets (see Our priorities for Queensland election). I agree with the AiP on the need to repair the budget, privatise assets and many of its other policies, but I question the seventh policy:

Enabling and promoting the industries where Queensland has a competitive advantage, specifically mining, agriculture and tourism.

Does the AiP really believe in an interventionist industry policy where the Government favours particular sectors over others? The AiP appears to have simply adopted the Government’s Four Pillars policy and knocked down one of the pillars: construction. But why shouldn’t the Government promote construction, or any of the other industries not listed? The Queensland economy is much more than three or four pillars, as I’ve noted in a previous post:

If it wants to promote growth and employment, the Government should not pick winners and discriminate between industries, but let market forces determine the optimal industry structure, a point that was repeatedly made by Ken Henry during the resources boom. I suggest the AiP should revise its seventh policy and replace it with something along the lines of: reducing the burden of regulation on all industries and only intervening where there is a clear case of market failure.

That said, I think it’s great that AiP has injected itself into the election campaign, and I support its call for a truthful campaign.

Disclosure: I was a participant in the foundation workshop for the AiP back in August 2014, but I’m not a member.

6 Responses to Good set of policy principles (mostly) from new Queensland think tank AiP

Thanks for your support Gene. In a completely purist scenario the government has no role, and there is nothing that needs to be done that private enterprise won’t do for itself. But that doesn’t always happen, and neither is it true, even to those who are regarded as very free market.

When Hayek wrote the Road to Serfdom and complained about central planning he wasn’t against planning, just certain types of planning. He saw a need for some sorts of central organisation. Similarly, so do we.

Take mining as an example. Some years ago the South Australian government did an aerial survey that turned up a whole lot of mineral resources, but it was too expensive for individual miners to undertake, and they wouldn’t have done it over the whole state. So it is a classic case where the government can, and should, step in. No individual player will do it because of free rider problems. It will be self-funding because the state will have more activity, and given there is more certainty about what is initially there, investors will be prepared to pay a higher price. Just as long as the state sells leases and collects royalties at the correct price it will be one government activity that generates an investment return.

Competitive taxation and regulation regimes can also give advantages in mining and other industries.

There are also infrastructure issues in all of these industries that only government can solve. Free market forces alone won’t build you a four lane highway any distance. It requires collective will and planning, and generally the coercive powers of the state to resume land.

Housing is not in our list because we don’t have a competitive advantage in housing – every state has heaps of land, and they’ve all copied each other’s ridiculous town planning legislations, so they are all essentially in the same boat. Newman has it in his four pillars idea because he sees it as a key employer, which it is, partly because of high immigration rates. We don’t because it is not something where Queensland has a competitive advantage over other states. He agrees with us on the other three, because we take a similar view, not because we are mirroring his policy.

Another area where the government might pay some attention is education, but again, we don’t have a comparative advantage there, so I didn’t put it in the list.

Graham, thanks for the comment and clarification. You’re referring to a general policy principle (which I agree with) that government should intervene where there is market failure, a principle which doesn’t discriminate between industries. I think it would be better if your seventh policy were re-stated along these lines and doesn’t single out particular industries.The way it’s worded now suggests to me, and no doubt others, that you’d like to promote these sectors at the expense of others and change the industry mix in their favour. It may be that market failures mean that corrective government action would do this, but you need to do the analysis first, including a cost-benefit analysis of any government action.

Well, I’m not sure that I would call them market failures per se, but using your terminology, you can’t treat every market failure, so you have to make decisions about which ones you will treat. There is a tendency in this country, and perhaps others, to follow the allure of the new, or the different. That is not necessarily smart when you already have a competitive advantage in a particular area. You should play to your strengths.

And there is a tendency to downgrade those things that you are already good at as being unimportant and that they will just look after themselves. So we run off and throw money at other industries. So, I’d take a lot of convincing that money spent on procuring movie productions is well-spent. But spending that money on a new port could be very well-spent. Of course it could be poorly spent too. In all cases you need to do cost-benefit analyses. But you also need to stick to your areas of expertise or your cost-benefit analysis may end up being inexpert and wrong.

Specialisation is a fundamental proposition in the work of classical economics, so I’m surprised you would have a problem. We’re not laissez faire. We wouldn’t have some of these industries if previous governments hadn’t gone out of their way to get them going and find investors. Having proved up the risk it wouldn’t make much sense to abandon the industry, or fail to continue the development and innovation. And I think that is something that needs to be pointed out.

Thanks again for your comment, Graham. I’m definitely not against specialisation. I’d just rather it be determined by comparative advantage, not what Government thinks are important industries. This might be a good topic for us to discuss at the upcoming Griffith event.